Steelmaker Results May See Lower Forecasts But Risk Is Less, Too

Posted on 24 April 2019

Source: Bloomberg

Steelmakers aren’t expected to do well when reporting first quarter earnings, and some are even expected to cut their annual guidance. But recent sell-offs in some equities have probably already priced-in this downside risk.

“Domestic steel industry fundamentals are clearly weaker heading into the first quarter EPS reports,” Longbow analyst Chris Olin wrote in a note to clients on April 15. His channel checks suggested a potential for a guidance cut from the likes of U.S. Steel Corp. and AK Steel Holding Corp. But these risks seem to have been already “fully discounted” by investors and the valuations of the stocks are “starting to look interesting,” after the recent decline in some steel stocks.

Cowen analyst Tyler Kenyon agrees that the risk-reward in steel stocks is more positive heading into first quarter earnings after the recent sell-off. But, given the potential downside for steel prices, the upside for the stocks is likely to be limited near-term.

A quick check of the year-to-date price chart gives a good overview of changing investor sentiment on the sector. The steelmakers saw an uptick early this year, around February, when benchmark hot-rolled coil (HRC) prices recovered from January lows and the Street was mostly optimistic on the group. Sentiment has since turned sour, as HRC prices started to decline and investors feared weaker fundamentals for the remainder of the year.

Steel Dynamics Inc., which kicked off steel earnings this week with a slight miss, was optimistic on market growth. “We believe the market dynamics are in place for domestic steel consumption to continue to increase this year,” said CEO Mark Millett. “Based on domestic steel demand fundamentals and continued customer optimism, we believe North American steel consumption will experience steady growth,” he added.

Investors will be keen on commentaries from the rest of the steelmakers, as they report first quarter earnings, to see if the positive outlook is repeated elsewhere.

Nucor Corp. reports its earnings on April 23, AK Steel on April 29 and U.S. Steel on May 2. Here is what some analysts are looking for when steelmakers report their first quarter earnings:

Cowen, Tyler Kenyon

Cautious on the sector and recommends investors maintain a defensive stance. Nucor and Reliance Steel & Aluminum Co. are his top picks as they have variable cost structures and strong free cash flow.

Sees risk that AK Steel and U.S. Steel will cut their full year carbon flat rolled shipment volume guidance. Thinks Steel Dynamics is among high quality defensive stocks but, of the two, prefers Nucor.

Goldman Sachs, Matthew Korn

The Street has lowered expectations for first quarter earnings due to low sheet prices and activity levels constrained by difficult winter weather. The stocks are caught between an unexciting near-term outlook and fears of a growing medium-term supply crunch.

AK Steel is expected to cut guidance due to lower year-to-date sheet steel prices. However, there could be some upside potential for electric arc furnace-based producers such as Commercial Metals Co., Nucor, Schnitzer Steel Industries Inc. and Steel Dynamics.